Power Companies Contend for Lucrative State Subsidies

Subsidized capacity will drive down the high electric prices that hurt businesses and consumers, advocates argue.

A new law aimed at encouraging developers to build power plants in New Jersey is apparently achieving its goal, with more than 35 projects vying for lucrative subsidies from state regulators.

In total, the projects would provide approximately 7,550 megawatts of new capacity, according to Greg Reinert, a spokesman for the state Board of Public Utilities (BPU), the agency that will decide what projects receive guaranteed payments from ratepayers.

The developers are hoping to be selected to build up to 2,000 megawatts of capacity, which will help drive down steep electric bills for residents and businesses in New Jersey, according to advocates of the law. While the list of proposed power suppliers has not been made public yet, some companies have said they are bidding to develop the new capacity, including Newark-based PSEG Power, and NRG Energy of Princeton.

Mounting a Challenge

Ironically the law is being challenged by some of the same suppliers seeking to win the subsidies in separate actions in federal court and before a federal agency. The law would provide a stream of payments from ratepayers to the companies over a period of 15 years. By some estimates, the amount of customer subsidies could top $2 billion, but proponents say it will be more than offset by a reduction in capacity prices, which account for about 20 percent of the generation charge on a utility bill. Companies fighting the legislation are concerned that losing those capacity payments would play havoc their bottom lines.

Whether the law will cut electric bills remains a bitterly disputed issue in a state where the high costs of energy have been blamed for businesses leaving New Jersey and hurting consumers struggling to cope with a deep economic recession.

While proponents of the law say the nearly dozen projects vying for the subsidies prove the program is working as expected, others said the process is troubling, given that few new plants have been built in New Jersey since the state deregulated the electric industry more than a decade ago.

With so few new plants coming online, the regional power grid in New Jersey, particularly the northern part of the state, is extremely congested, a situation that drives up energy prices. According to the state’s Energy Master Plan (EMP), consumers here will pay between $1 billion and $1.9 billion because of the congestion and a perceived lack of capacity to maintain the grid’s reliability.

The Free Market

"What it tells you, the free market is not working," said Assemblyman Upendra Chivukula (D-Middlesex), the chairman of the Assembly Telecommunications and Utilities Committee. "Everyone is looking for a handout."

But Sen. Bob Smith (D-Middlesex), the chairman of the Senate Environment and Energy Committee, thought otherwise.

"The way I look at it, it opens up a real opportunity to develop new capacity," Smith said. "If you are in the energy business, you’d be a fool not to take advantage of it."

Paul Patterson, an energy analyst with Glenrock Associates, agreed. “"It’s a question of price certainty," he said. "If the economics are attractive, people will come."

But critics of the law say the program could undermine the wholesale market for electricity by artificially depressing capacity prices. If that were to happen, it would be difficult for New Jersey to attract new investment in building additional capacity, they say, and virtually impossible unless it handed out additional lucrative subsidies.

Jeff Tittel, executive director of the New Jersey Sierra Club, said the law demonstrates "that nothing succeeds like excess. This is an excessive giveaway of consumers’ money," he said.

The BPU is expected to decide by the end of the month which projects, if any, win approval for the subsidies.